For the ninth time in its history, Argentina went into default.
This Friday the deadline for the country to pay US $ 503 million in interest to a group of its private creditors with bonds under foreign law expired.
By not paying and not closing a debt restructuring or exchange agreement with its bondholders, Argentina entered into what is called a “selective default”.
What does it mean?
That a part of its external debt – those securities that were unpaid – went into default. But not the rest of its public debt, which in total exceeds the $ 320 billion (about 90% of its Gross Domestic Product, GDP).
Is about bad news for the Alberto Fernández government, that it failed to get creditors to accept the restructuring proposal it submitted in mid-April.
While there is a consensus among economists that selective default is a “technical” issue – some call it a “default light or soft«-, it is not without negative consequences for a country.
The first is that it opens the doors to a possible judicial complication if Argentine sovereign bondholders decide to go to court and demand their payment, on the grounds that Argentina is not a reliable payer.
The second consequence is that so-called “default insurance” (CDS) are activated, which are usually in the hands of hedge funds (commonly known as “vulture funds”).
Argentina was 15 years without access to markets due to a dispute with the so-called “vulture funds” after the default of 2001. BBC WORLD / .
Some warn that these “vultures” could spring into action, taking advantage of Argentina’s problems to buy its cheap bonds and then lock a future restructuring.
Finally, there is the issue of reputation: even if it is technical, this new default is placing Argentina only one notch below Ecuador and Venezuela, the countries with the most sovereign defaults in modern history.
But despite all this, the news of this new Argentine default has not generated the same pessimism that caused the previous defaults, in particular the most remembered (and largest): that of 2001, which at the time was the largest in history.
Although during the week the probable default of Argentina was anticipated this Friday, the market signals in the previous days, far from being dire, were encouraging.
Argentine bonds rose in price, while the parallel dollar -considered a thermometer of market sentiment- began to drop, after having climbed rapidly.
And the so-called «country risk», which measures the probability of a country falling into default, instead of rising, fell.
How is it explained?
«The most linear reading is that there is some expectation that the default will only be temporaryl and an agreement will be reached more global with bondholders », he tells BBC Mundo Alan Cibils, researcher in the area of Political Economy at the National University of General Sarmiento.
The Argentine government extended the term of the negotiation with its creditors, which expired this Friday, until June 2, a clear sign that the discussions are continuing.
Argentine Economy Minister Martín Guzmán negotiates a debt swap with Argentina’s main foreign creditors. BBC WORLD / .
Meanwhile, the Argentine economy minister, Martín Guzmán, minimized the importance of the default, stating that it was “anecdotal”.
«I would think of the date of May 22 as an anecdotal date. We are in a process, we are in the middle of negotiations, both parties are working with the intention of reaching an agreement, “he said Tuesday, during an event in Washington.
According to some local media, the Argentine government has signed a “truce” with its main creditors to ensure that they will not sue the country while negotiations to carry out a debt swap continue.
A month ago, Guzmán submitted an offer to his private creditors with dollar securities under foreign law, many of which are Wall Street investment funds.
Although these bondholders represent about 20% of the total Argentine debt (US $ 66,000 million), are the main challenge of the government, since without an agreement with them, it will be impossible for Argentina to restructure its debt.
The exchange proposal contemplated a 62% interest reduction, a 5.4% capital drawdown and a “grace period”, without making payments, of three years.
According to the economist Marina Dal Poggetto, executive director of the consulting firm Eco Go, in practice meant that Argentina offered to pay 0.40 cents for every dollar it owes.
The offer was widely rejected.
However, in recent days the Argentine government received three counteroffers, which it continues to evaluate.
Most analysts agree that there is a will on both sides to reach an agreement. BBC WORLD / .
The feeling among most analysts is that from both parties there is a desire to reach an agreement, although the deadlines have not been reached to achieve it before the expiration of this Friday.
«It suits both of you. Investment funds operate in the short term, they have to show results now. They are suffering losses everywhere (due to the coronavirus pandemic) and the cost and time of going to trial are not convenient for them, “says Cibils.
Dal Poggetto agrees: “The funds need to have an income, they do not seek prosecution,” he tells BBC Mundo.
In addition, he believes that they will have some urgency to reach an agreement: “In a few months it will be more difficult to negotiate, post pandemic,” he says.
Thursday, International Monetary Fund (IMF) spokesman Gerry Rice joined the optimistic voices.
“We are encouraged by the willingness of both parties to continue talks to reach an agreement. We hope an agreement can be reached that sets the stage for a sustainable path for the Argentine economy for the future, “he said during a press conference.
What will happen now
Experts argue that negotiations are likely to take days or weeks.
“I think he will see news sooner rather than later, it seems to me that the negotiation is on track,” says Dal Poggetto.
Once they agree with foreign holders, the country will have to negotiate with local bondholders, although it will be easier, since local legislation allows the government to take unilateral measures, such as the so-called “Reprofiling” (postponementón of payments) that has already been applied by the previous government of Mauricio Macri.
Argentina has a tense relationship with the IMF, but the agency has supported the country in its negotiations with its private creditors. BBC WORLD / .
A more difficult stumbling block will be negotiating with multilateral credit organizations, in particular the IMF, which in 2018 agreed with the Macri government on the largest loan in its history.
The IMF is today the main creditor of Argentina, which will now have to agree to repay the US $ 44,000 million it received.
Some believe that the importance of Argentina managing to restructure its debt goes far beyond the borders of that country Latin American.
In an opinion piece published Tuesday in The New York Times, Mark Weisbrot, co-director of the Washington-based Center for Research in Economics and Policy (CEPR) noted that “hundreds of millions of people in this planet »could be influenced by the outcome of the Argentine negotiations.
In conversation with BBC Mundo, Weisbrot explained that the reason is that «Argentina serves as a witness case for the many other countries whose current debt burden is unsustainable».
“We are living in a time of crisis like never before, with a pandemic and a recession that feed each other, and in this context the attitude taken by private creditors and credit agencies with Argentina will definitely set a precedent,” he says.
According to Weisbrot, a successful negotiation could lead the way to avoid a string of defaults from other countries in crisis.